IBI sees faster pace for interest rate hikes

Bank of Israel Governor Prof. Stanley Fischer yesterday raised the interest rate for January by 0.25 basis points to 1.25%. Commenting on the decision, IBI Investment House Ltd. said, "The Bank of Israel mentioned in its background conditions that inflation stands at 3.8% over the last year and 2.6% without government decisions. The central bank's reference to this fact is new because until now the Bank of Israel has said that inflation after government decisions was not high."

IBI asks what have we learned from the interest rate decision. The investment house said, "Firstly, and if in the past we have pointed out that the Bank is prepared to refrain from talking in terms of inflation in favor of more expressions about growth and employment, here we see that this restraint is not infinite. The rise in the rate of inflation (after government decisions) is close to the upper limit of the price stability target, and the rise in expectations for the coming year and the years after that in this area, are not comforting for the Bank, and therefore it has come back and stressed today the war on inflation. Thus a modest rise in interest is not enough in order to moderate inflationary expectations, and the current interest level, as the Bank states, is still low, and real interest in the economy is still negative."

IBI continued, "Secondly, when the Bank feels uncomfortable regarding price rises of various assets (it is reasonable to assume this mainly relates to real estate prices, but not solely), and therefore, asks to prevent the creation of a price bubble, by making money more expensive. In this instance too, it is not enough to put interest up to the 1.25% level, but interest in the economy must continue to rise, in the near future as well.

IBI added, "Thirdly, the Bank is more encouraging of the level of activity in the economy (if an update is expected by the Bank in its 2010 growth forecast?) and developments in the job market. That is not to say that we will not see the central bank still intervening in foreign currency trading but it definitely puts the emphasis of the Bank's policy more on restraining inflation (as we explained in the first point) and less on growth. In our estimation, the day is near when the Bank will stop intervening on the foreign currency market."

IBI concluded, "We place great importance on inflationary expectations but also on job market data in everything related to fixing the interest rate in the economy. What do we take from this? That the pace of the rise in interest in the coming months will be faster than we expected before the present decision. We still expect that monetary interest in one year will be 3%.

Published by Globes [online], Israel business news - www.globes-online.com - on December 29, 2009

IBI sees faster pace for interest rate hikes

IBI: The Bank of Israel's reference to inflation is new.